BETHESDA, Md.--(BUSINESS WIRE)--Feb. 25, 2008--USEC Inc. (NYSE:USU) continues to make solid progress in its plan to deploy the most advanced uranium enrichment technology in the world, but the impact of significant price pressure on labor, commodities and construction materials is increasing management's anticipated cost for completing the American Centrifuge Plant (ACP) now under construction. A comprehensive review is currently underway and the results are expected in the second quarter.
USEC is obtaining important operating data from the Lead Cascade testing program that is identifying improvements in design, assembly and operations that are being factored into the AC100 series centrifuge machine. The initial design release for the AC100 machine is expected at the end of March 2008. USEC is also taking steps to transfer the American Centrifuge technology to strategic suppliers who will build the machines and the balance of plant infrastructure. These steps have furthered the maturity of the design for both the AC100 machine and the balance of plant.
As we move forward along multiple project paths, we are seeing the same cost pressures that are affecting many large capital projects today. Commodities, construction materials, specialty items and skilled labor have increased at a rate far greater than general inflation. A recent Cambridge Energy Research Associates study found that the anticipated cost of building new nuclear power plants has increased approximately 40 percent in the past year. USEC is not immune to these cost pressures. We are in the midst of a review and update to our 2007 project cost estimate and expect to announce a comprehensive project budget in the second quarter of 2008. At this point, however, we expect the project budget for the ACP will be about $3.5 billion, which includes $615 million spent through December 31, 2007, but does not include costs for financing or financial assurance.
"We are re-creating an industrial base for uranium enrichment in the United States from the ground up," said John K. Welch, USEC president and chief executive officer. "USEC underestimated the cost and the time it is taking to re-establish the supply chain infrastructure and the skilled labor needed to build the American Centrifuge Plant. In the past two-and-a-half years since I joined USEC, I've made it a priority to develop a realistic program for deploying the American Centrifuge technology. And while some of the higher costs are project specific, particularly skilled labor, we are also experiencing upward pressure embedded in the costs of commodities and basic materials, like steel and aluminum.
"I am committed to ensuring that we keep this project economic for our investors and price competitive for our customers. Given the strong market we see for nuclear fuel in the decades to come, we expect solid customer demand for enrichment coming from the American Centrifuge Plant. We are in intense negotiations with our strategic suppliers to reduce costs, and we are looking at ways to lower costs through value engineering," Welch said.
"When we complete our bottom-up review in the second quarter, we will have a comprehensive project budget with a refined work break-down structure based on a more advanced machine and balance of plant design. We will have completed the process of implementing cost controls and earned value metrics that are integral for effectively managing the full scope of the project," he said.
"We also expect to continue our successful efforts to optimize the American Centrifuge machine to further improve its productivity and long-term reliability, which will enhance the value proposition of the ACP," Welch said.
Lead Cascade Integrated Testing Program
Since August 2007, we have been conducting operations in our Lead Cascade testing program, which involves the integrated testing of multiple centrifuge machines in a cascade configuration. This work is taking place at our American Centrifuge Demonstration Facility in Piketon, Ohio, within an existing building that will ultimately house the commercial plant. The machines we are operating in the Lead Cascade program are in a closed-loop cascade configuration where the uranium gas is enriched, depleted and re-combined in a repetitive cycle, as required by our license issued by the U.S. Nuclear Regulatory Commission.
The Lead Cascade test program is an important step in the deployment of ACP. USEC designed the Lead Cascade test program with a number of objectives in mind, and we have achieved these objectives. As we previously reported, we have demonstrated the ability of the cascade to generate product assays in a range useable by commercial nuclear power plants, obtained data on machine-to-machine interactions and verified cascade performance models under a variety of operating conditions. We have also obtained data on the performance of centrifuge components that is being factored into the design of the commercial production centrifuge machine, which we refer to as the AC100 series.
We expect that Lead Cascade testing operations will continue at various operating conditions and configurations to aid in confirming design parameters for the AC100 series machine, to provide further reliability data and to provide additional training to operators and technicians. We also expect the existing cascade of prototype machines to help us identify improvements in design, assembly and operations that will be factored into the AC100 machine, which will help USEC and our suppliers ensure reliability and achieve lower costs through high-volume manufacturing for full-scale commercial deployment.
AC100 Design and Testing Activities
As we continue with our Lead Cascade testing activities, we are simultaneously working to finalize the design of the first series of plant production centrifuges that will be manufactured by our strategic suppliers. The initial design release for the AC100 machine is scheduled for the end of March 2008. Using the specifications from this design release, we and our strategic suppliers will begin to make various components and test these AC100 designs under a variety of operating conditions at our Oak Ridge facilities over a six-month period this year.
Our strategic suppliers will proceed with their manufacturing facilitization efforts with the goal of assembling and installing a cascade of 30 to 40 AC100 machines, based on the initial design release, in late 2008. We will then begin integrated testing of these machines in early 2009. We expect the initial AC100 design release to achieve a performance level of approximately 350 SWU per machine per year. This initial design release will not meet our desired targets for machine cost and performance, and therefore, we will continue our efforts to identify improvements in design, assembly and operations that can help ensure reliability and lower the cost of the AC100 machine. The final design for the first series of AC100 machines that will be produced in large quantities for ACP will reflect any improvements resulting from individual machine testing and subsequent integrated testing.
We also expect to continue our research and development efforts as the first phase of the plant is built. We will incorporate improvements at specific planned points as we build out the initial capacity of ACP to its 3.8 million annual SWU production capacity. New analytic capability and computer-aided manufacturing methods provide an opportunity to develop more productive and less costly machines as we seek to enhance our capability in centrifuge technology and develop a new series of machines. This will result in continued development spending that will be expensed.
ACP Construction Update
To date, we have custom-built nearly all of the components ourselves for the American Centrifuge machines assembled for our Lead Cascade test program. We continue the process of transferring the technology for assembling our American Centrifuge machines to our strategic suppliers as we and our suppliers prepare manufacturing capacity for the classified components and carbon fiber rotor fabrication, and transfer responsibility for rotor balancing. Our goal is to develop the manufacturing infrastructure and capacity with our suppliers to be prepared for high-volume manufacturing in 2010.
Essentially all of the buildings required for the commercial plant were constructed in Piketon during the 1980s by DOE. These existing structures include a centrifuge assembly building, a uranium feed and withdrawal facility and two enrichment production buildings. Fluor Corporation is managing the engineering, procurement and construction activities related to these structures, process systems to integrate and support the centrifuge machines and cascades, and the balance of plant infrastructure. The feed and withdrawal facility is where the natural uranium is fed into the commercial centrifuges and enriched product is removed. The process systems include service modules that provide utilities to the centrifuge machines and interconnecting piping that enables uranium gas to flow throughout the enrichment production facility, as well as a distributed control system that monitors and controls the enrichment processing equipment. The balance of plant infrastructure includes electric, telecommunications, cooling and water distribution. Fluor began refurbishment and ancillary construction work in May 2007. Design, procurement, refurbishment and construction activities for these facilities will continue through 2011.
Since 2004, we have been working with our strategic suppliers primarily under cost-reimbursement agreements. We are in the process of negotiating modifications of these arrangements so that we and our suppliers will share certain cost, schedule and performance risks. We have been pursuing a phased approach to contracting, with work divided into three stages: demonstration, initial AC100 machine production, and the balance of commercial plant machine production. As we proceed with the project, we intend for contracts with suppliers to transition from a cost-reimbursable model to a fixed price or incentive based model, as appropriate.
Project Cost and Schedule Update
We established a target cost estimate in early 2007 for completing the ACP of $2.3 billion, which included spending to date but did not include financing costs or a reserve for general contingencies. At that time, we also established our current schedule for deployment of ACP. During 2007 we saw variances in spending and commitments for components for the ACP from corresponding amounts in our target cost estimate of approximately 15%, which helped to form our view that a reserve for general contingencies of approximately 15% to 20% was reasonable at the time. We have insight into more than $1 billion of ACP costs through costs of $615 million incurred through December 31, 2007, and near-term commitments. Our spending and commitments to date have remained within the 15% to 20% contingency band we had previously viewed as reasonable.
USEC is now in the midst of a thorough, bottom-up review of the cost to build the plant based on greater maturity of machine design and balance of plant design. We expect to complete and announce a budget for the project in the second quarter of 2008. Our current negotiations with suppliers regarding the significant scope of work that remains indicate that overall costs for the ACP will be higher than we previously estimated. As seen in other large construction projects currently underway, our costs are also under pressure. In addition, since we are completing machine design concurrent with developing manufacturing and balance of plant cost estimates, offsets to these upward cost pressures are difficult to quantify. Among the factors that are creating upward pressure on costs are higher than anticipated costs from our suppliers for project management, supervision, labor and overhead, and higher commodity and material prices. We also expect higher than anticipated demonstration costs as we continue to spend time working to reduce the manufacturing cost per machine through value engineering.
Based on where we are in the bottom-up review of the target cost estimate, we expect that the project budget that we will establish in the second quarter will be about $3.5 billion, including expenditures to date, but not including costs for financing or financial assurance. We are continuing to evaluate bids received and negotiate with our suppliers. We are also continuing our design and value engineering efforts to lower the overall project cost. However, we may not be successful in our negotiations and value engineering efforts, and there may be further upward pressure on costs as we establish the project budget over the next several months. We expect to spend between $650 and $700 million in 2008, with most of the spending in 2008 being capitalized.
As part of our bottom-up review we are also looking at the ACP deployment schedule. We are evaluating whether the project risk and cost can be improved by modifying items such as the timing of the final design release for the AC100 machine and value engineering efforts, when to begin making AC100 components for the commercial plant, and the ramp up to high-volume manufacturing. Therefore, a decision could be made to slow the pace of one or more steps in order to lower or manage the overall risk and cost of the project.
USEC Inc., a global energy company, is a leading supplier of enriched uranium fuel for commercial nuclear power plants.
Forward Looking Statements
This document contains "forward-looking statements" - that is, statements related to future events. In this context, forward-looking statements may address our expected future business and financial performance, and often contain words such as "expects," "anticipates," "intends," "plans," "believes," "will" and other words of similar meaning. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For USEC, particular risks and uncertainties that could cause our actual future results to differ materially from those expressed in our forward-looking statements include, but are not limited to: the success of the demonstration and deployment of our American Centrifuge technology including our ability to meet our performance targets and schedule for the American Centrifuge Plant, the cost of the American Centrifuge Plant and our ability to secure required external financial support; the cost of electric power used at our gaseous diffusion plant; our dependence on deliveries under the Russian Contract and on a single production facility; our inability under existing long-term contracts to pass on to customers increases in SWU prices under the Russian contract resulting from significant increase in market prices; changes in existing restrictions on imports of Russian enriched uranium, including the imposition of duties on imports of enriched uranium under the Russian Contract; the elimination of duties charged on imports of foreign-produced low enriched uranium; pricing trends in the uranium and enrichment markets and their impact on our profitability; changes to, or termination of, our contracts with the U.S. government and changes in U.S. government priorities and the availability of government funding, including loan guarantees; the impact of government regulation; the outcome of legal proceedings and other contingencies (including lawsuits, government investigations or audits and government/regulatory and environmental remediation efforts); the competitive environment for our products and services; changes in the nuclear energy industry; and other risks and uncertainties discussed in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K and subsequent quarterly Form 10-Qs. Revenue and operating results can fluctuate significantly from quarter to quarter, and in some cases, year to year. We do not undertake to update our forward-looking statements except as required by law.
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SOURCE: USEC Inc.